Capital ideas for using low rates

As interest rates tumble and the banks and building societies are being forced – sometimes kicking and screaming – to cut the mortgage rates they charge us, what should we do with the cash we save?

It can be quite a lot. January’s cut brought the bank rate down to 1.5% from 5.75% a few months ago. People with tracker mortgages that followed that rate down would see their monthly payments on a repayment mortgage fall by one-third.

On a £100,000 loan that means a drop from £629 to £400, a saving of £229 a month. Interest-only mortgage payments fell by three-quarters from £479 to £125, a cut of £354 a month on a £100,000 loan. If rates fall even further those savings may grow.

But not everyone will have seen their payments fall to this extent. Some lenders impose a limit on how far trackers will fall. Those on what is called the standard ­variable rate will have seen smaller falls. Also anyone on a fixed rate may well have been gnashing their teeth.

The government and the Bank of England hope we will go out and spend this money. After all, rates are cut to send us shopping and boost the economy. But the sensible thing to do with these astonishing cuts is just say “no”.

Keep your payments at the same level so the cut in interest is used to repay the capital. On a repayment mortgage that will cut the term you owe the money for. On an interest-only mortgage it will help you sleep a bit better. If you are only paying the interest you are in effect renting the property.

There is also the danger that with house prices tumbling you may find that, when the mortgage comes to an end, your home may not be worth enough to repay the debt, never mind make enough profit to buy somewhere bigger than a tent.

But beware. Not all lenders allow you to overpay your mortgage and most of those that do impose a limit. So contact your lender and find out how much you can repay without penalty and use as much of the saving as you can to repay your capital. You may not thank me now. But in 10 or 20 years when you are debt-free you will say…“that really was money magic”.

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